Are you using a Tablet PC. If so, there is an issue with the Propogate
Labels facility that is supposed to copy the mergefields from the first
label into every label on the sheet, though in my case it does copy it to
the second and third labels and the final two labels on the sheet. This has
been reported as a bug, but no resolution yet. In the meantime, the work
around is to manually copy and paste the mergefields into each label in the
mailmerge main document.
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Hope this helps,
Doug Robbins - Word MVP